Peter Diamond, the Nobel Prize- winning economist struggling to win confirmation to the Federal Reserve Board, said his research helps inform monetary theory and gauge risks to the financial system.
Diamond shared the 2010 Nobel Prize in Economic Sciences in October with Dale Mortensen and Christopher Pissarides for research into the difficulties of matching supply and demand, particularly in the labor market.
The work is a “starting place for applied research in a wide variety of areas,” including “monetary theory and analysis of the capital market,” Diamond, a Massachusetts Institute of Technology professor, said today in testimony at his second Senate Banking Committee nomination hearing in nine months.
Diamond stepped up the defense of his scholarship after Alabama Senator Richard Shelby, the panel’s senior Republican, said the professor was not qualified to join the Fed because of insufficient knowledge of monetary policy.
“The varying speeds between the occurrence of surprises to financial firms and their abilities to respond is a central element in the development of financial crises, making search theory an important part of understanding how to avoid and limit future shocks to the financial system,” Diamond said in today’s testimony.
The White House renominated Diamond, 70, in January, marking a third try at confirmation after the Senate adjourned in December without approving him. Diamond’s initial candidacy was returned to the White House in August under a procedural objection.
Today, Shelby reiterated and amplified his opposition to Diamond, saying that while he’s a “very accomplished academic and economist,” he lacks experience in areas a Fed governor should have, including conducting monetary policy, bank supervision and crisis management. In addition, Shelby objected to what he said is Diamond’s support for monetary and fiscal stimulus backed by the Fed and White House.
Rhode Island Senator Jack Reed, the panel’s No. 2 Democrat, countered that Diamond is “superbly qualified” for the job and suggested that he could provide the central bank with different economic perspectives.
Diamond faces a larger Republican minority this year that could block his nomination again after the party took seats from Democrats in November’s midterm elections. Last year, while Obama’s two other Fed nominees were approved by the Senate, Republicans questioned Diamond’s expertise and the nomination’s compliance with a law that bars having two governors come from the same region of the U.S.
Since Diamond’s renomination this year, Fed Governor Kevin Warsh announced his resignation, opening a second vacancy on the central bank’s board. The White House has yet to pick a replacement.
All governors, along with five of the 12 regional Fed presidents, have a vote on monetary policy at each Federal Open Market Committee meeting. The FOMC, which next meets March 15, voted 11-0 on Jan. 26 to maintain its unconventional-stimulus plans and buy $600 billion of Treasuries through June.
“I share the view that has been expressed by the existing governors that it is helpful in the right direction,” Diamond said of the Fed’s stimulus at a Jan. 27 economics symposium at MIT in Cambridge, Massachusetts.
Diamond was scheduled to testify today along with two other witnesses, Katharine Abraham and Carl Shapiro, who are nominated for President Barack Obama’s Council of Economic Advisers.
Abraham, a University of Maryland professor, said she would aim to “provide economic insights and analysis that will help with the formulation of policies conducive to broadly shared growth.”
Shapiro, who has recently served as chief economist in the Justice Department’s antitrust division, said that if confirmed, “I hope to contribute my expertise to the development of policies that promote economic growth by creating a business environment that encourages private sector innovation and investment.”
Diamond’s nomination for a term ending January 2014 had been held up by Republicans last year. Shelby has voiced doubts about Diamond’s qualifications on monetary policy and his regional designation.
The White House designated Diamond as being from the Chicago Fed district to comply with the law. In a Nov. 30 interview, Diamond, a professor at MIT since 1966, defended his professional connections to the region, saying it was sufficient for the provision. He cited teaching for one quarter at Northwestern University in Evanston, Illinois, seminars at Northwestern and the University of Chicago and other visits for a few days apiece to schools in the region.
Shelby said today that he believes Diamond is “legally not eligible to serve” because of the geographic restriction in the law. “I encourage the President to withdraw this nomination and look beyond the Boston to D.C. corridor for a new nominee,” Shelby said.
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